Can I Put My Assets Into A Trust To Avoid A Debt?

As a lawyer, I get this question alot…

The answer to it is… “Kind of… but it’s hectic and ill advised”

The general rule is that a client may not transfer property to a trust for one’s own benefit and avoid a creditor’s claim.

If a settlor creates such a trust, he could effectively assign his interest and his creditors can reach it. It is immaterial that the settlor in creating this trust did not intend to defraud creditors or was solvent at the time of the creation of the trust. It is against public policy to permit a man to tie up his own property in such a way that he can still enjoy it but can prevent his creditors from reaching it.

The general rule is that creditors of a settlor who creates an irrevocable trust for the benefit of himself and others can reach the maximum amount distributable to the settlor under the terms of the trust.

If the settlor creates a trust for his own support the settlor’s creditors can compel the trustee to pay them the maximum amount which the trustee could pay the settlor-beneficiary or apply for his benefit.

If the trust provides that the trustee is to pay to the settlor-beneficiary only that amount which is “necessary” for his support, the court will determine that amount and direct the trustee to pay it to his creditors. If the trust provides that the income is payable to the settlor-beneficiary for his lifetime and so much of the principal as is necessary for his support, and if the income is sufficient for his support then the principal cannot be paid to his creditors.

If the settlor creates a discretionary trust and the trustee is to pay to the settlor and others so much of the income and principal as the trustee in his sole discretion may determine, the settlor-beneficiary’s creditors can reach the maximum amount that the trustee could pay to him or apply for his benefit. This is true even if the trust is irrevocable and even if the trust has a spendthrift provision. The policy that prevents a person from creating a spendthrift trust for his own benefit also prevents him from depriving his creditors of a right to reach the trust property.